Panama has been one of the fastest growing economies in the world over the previous decade. In that short but vibrant time span, the country managed to double its income per capita. Growth has been spearheaded by the development of a modern service sector on the activities surrounding the Canal, and non-residential construction. Large public infrastructure projects and the private provision for infrastructure demanded by the service sector, have fueled growth and expanded job opportunities for non-skilled workers.

Two warning signals hover over Panama’s stellar performance. The construction sector has been growing at a rate equivalent to doubling its stock of structures every four years. The demand for non-residential construction cannot grow indefinitely at a higher rate than the rest of the economy. Once the stock of infrastructure required by the service sector is set and large infrastructure projects are completed, the rate of growth will recede and other sectors shall take the leading role. The deceleration of construction, characterized by a lower demand of non-skilled labor, will feed into the second warning signal: Income inequality. In spite of the minor improvements registered over the accelerated-growth spell, Panama remains amongst the world's top five most unequal countries. Both warning signals point to the need of further diversifying the Panamanian economy, and promoting economic activity in the provinces so as to deconcentrate growth and make it more inclusive.

1.
Center for International Development
at Harvard University
Shifting gears in Panama:
Policy recommendations for sustainable and
inclusive growth
Miguel Angel Santos
@miguelsantos12
www.miguelangelsantos.net

5.
In spite of that, Panama remains among the most unequal
countries in the world
5
PAN
2030405060
GINIIndex,year2010
6 8 10 12
GDP per capita (logs)
Source: own calculations based on WDI (World Bank)
Gini coefficient (2013)

6.
Growth has been spurred by the development of a service sector
that demanded non-residential construction
6
Weighted Contribution to Growth (CAGR * Ave Weight in GDP)
-0.3% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8%
Construction
Wholesale, Retail, Vehicle Repair
Transport and communications
Housing
Financial intermediation
Public utilities
Mining
Manufacturing
Restaurants and hotels
Other social services
Social services and private health
Private education
Agriculture
Fishing
2005-2015 2010-2015
Wholesale, Retail and Repair
Transport and communications
Financial intermediation
Non-residential construction has
been growing at a CAGR of 20.25%
for a decade, that is equivalent to
duplicating the stock of structures
every four years

7.
In terms of exports, the real driver behind Panama’s astonishing
success is the development of an exportable service sector
7
Export of services per capita (US$ million)

14.
2) Human capital: Panama embarked on a high-skill growth strategy,
based on the competitiveness of its service tradable sector
14
Economic Complexity by Industry

15.
2) Human capital: Panama embarked on a high-skilled growth
strategy, based on the competitiveness of its service tradable sector
15

16.
2) Human capital: Panama embarked on a high-skilled growth
strategy, based on the competitiveness of its service tradable sector
16
Economic Complexity, qualified labor and share of employment (2010)

21.
Four facts about immigrants in Panama
21
1. There are scarce (they are expensive)
2. Immigrants are over-represented in high-skill occupations
3. Immigrants tend to work in the more complex industries
4. Immigrants tend to raise the salaries of Panamanian workers
within their industry-district

22.
1) A sign of skill scarcity: Wage premiums to foreign workers are very
high on average(50%), and positive for all industries and occupations
22
Wage premiums to foreigners (2010)

26.
26
Panama wants to be Singapore or Hong Kong: they need to attract
and retain a large number of foreigners demanded by their high-skill
specialization strategy

27.
The strategy of attracting multinationals raised the skill bar and allowed
Panama to develop a modern service sector, but many restrictions prevent
knowhow and productivity to spillover to the rest of the economy
27
• Hefty fees for visa renewals (US$2.000-3.000 per year)
• Years spent on SZEs do not count for residence purposes
• Special work visas granted to foreigners in MNCs and SEZ cease as they stop working in the
company that sponsored them
• Dependents of expatriates and other foreigners (“friendly countries”) not allowed to work
• Firms threatened to be expulsed from City of Knowledge and visas of their workers ceased
if they stop innovating and move on to the commercial phase of the business
• There is a list of 27 occupations that are legally restricted to immigrants, including all type
of engineers, dentists, agriculture scientists, architects, doctors, economists, lawyers,
chemists, and educators in the areas of history and geography
• There is a list of restrcited citizenships comprising 50 countries from Asia and Africa, that
need a special bureaucxratic process “authopriozed visa” to enter Panama
• Albania, Bangladesh, China (exception made via SEM Law), India, Indonesia, Lebanon,
Pakistan, Sri Lanka
RESTRICTIONS TO FOREIGNERS ALREADY LIVING IN PANAMA
RESTRICTIONS TO POTENTIAL IMMIGRANTS

28.
Policy recommendations for keeping growth momentum in Panama
and make growth more inclusive
28
National Development Plan Guidelines
Reduce transaction costs to qualified immigrants
• Revises and gradually phase out list of restricted professions
• Revise relevance of restricted citizenships subject to “authorized visas”
• Grant working visas to highly qualified dependents
Make growth inclusive
• Create a public-private investment agency responsible for evaluating
industry potential in the provinces, contacting the right partners, solve
the most binding constraints and monitor progress
• Leverage existing knowledge within Panamanian provinces and look at
expanding to higher-value added industries that use similar knowledge
Attract and retain high-
skill human capital and
know-how
Maximize spillovers
and knowledge
diffusion
Promote growth
diversification in the
Panamanian province
Prevent knowledge from being locked into MNCs and SEZ
• Ease residence requirements for expatriates in MNCs and SEZs
• Create a minimum training requirements in MNCs receiving tax benefits
• Extend length of visas across the board